You’re a landlord now. Whether you have two or two-hundred properties, you need to separate your personal and rental property finances. It’s crucial for the wellbeing of both your business and your personal assets. Below are the top four reasons why you need to have separate accounts.
#1: Prevent Intermingling of Funds
While it may seem easier to have one account for everything, it ends up being more confusing and, in some states, illegal to do so.
Your tenants have entrusted you with their hard-earned money. The security deposit belongs to them, and you should always treat that money as though you are going to return it to them in full at the end of their lease. Of course, in the case of lease violations or damage, you may be able to deduct funds from that security deposit. However, until you do a thorough inspection and itemize everything that you are deducting from your renter’s deposit, that money belongs to them. It is their right to have their money stored away safely and separately, so make sure you do that to maintain your reputation as a good landlord.
Also, some states require landlords to keep their security deposits separate from their other assets. As always, check with your local laws to double check, but even if your state does not require you to separate the two funds, you should do it anyways. It’ll make your life a lot easier in the long run.
#2: Prepare to Grow
You’re only human. You have a lot on your plate, and when you add in a thriving real estate business, there gets to be a lot of moving parts you have to keep track of. There’s paperwork, financial records, and many other things you have to think about. More properties equal more transactions and a greater need for organization.
When you use a separate bank account for rental property, it’s much easier to get a clear view of how your properties are financially performing since the only funds you have in that account are those related to your business. By studying this data, you can make informed, strategic decisions when investing in your next venture since you already know what is profitable and what is not.
Also, if you are looking to form strong relationships with lenders or investors, you’re able to provide financial statements that show your real estate business as its own, separate legal entity. When they see that you can provide solid data relating to your investments, they are much more likely to have confidence in the legitimacy of your business.
#3: Protect Personal Assets
It’s important to be aware of what the legal risks are when you become a landlord. If your personal assets and real estate funds are together in the same account, it’s possible that your account could become frozen when hit with a lawsuit. Your personal funds would then be inaccessible because you didn’t differentiate between what belongs to you and what belongs to the business.
When you have separate bank accounts for your rental properties, although your business account may be frozen when hit with a lawsuit, your personal assets are safe.
Also, by having separate accounts, you can show the court that your business is a separate legal entity from your personal funds. You look more professional and respectable this way. And, in some instances, separating professional and personal money can help you secure insurance coverage for your rental properties.
#4: Simplification and Clarification
When it comes to accounting and taxes, having separate accounts is a must. You can easily track rental income and expenses and create financial reports when your accounts are separate, or you can more easily provide data from that account to a professional accountant or tax preparer without having to comb through each transaction and decide whether it was business or personal.
The same idea is valid for keeping detailed records. If you have separate accounts, you only have one account to track payments and expenses from, without having to decide whether one transaction or another counted as personal or professional. Also, if the IRS audits you, you will need to identify which transactions are related to your business and which aren’t. Save yourself the headache and separate your accounts ASAP.
Conclusion
All the tips listed above should be enough to convince you to separate your business and personal funds. It’s easier for you, your tenants, and any tax or accounting professionals you may hire to work out your finances. Do yourself a favor and switch to separate accounts today. You won’t regret it.
